FORM OF AGREEMENT AND
                        ASSIGNMENT BY SGI INTERNATIONAL

                                       TO

                              LFC TECHNOLOGIES LLC
                                (First Transfer)


This AGREEMENT AND ASSIGNMENT (this "Agreement"), is made effective as of
October 29, 1999, by and between SGI International ("SGI") and LFC Technologies
LLC ("LFC Co."),

                                  WITNESSETH:

WHEREAS, SGI is the inventor of the LFC Technology, which upgrades low grade
coal into a higher Btu coal and produces coal liquids;

WHEREAS, SGI entered into a partnership with SMC Mining Company whose name was
later changed to Bluegrass Coal Holding Company ("Bluegrass") and whose
wholly-owned subsidiary, ENCOAL Corporation ("Encoal") constructed a Liquids
from Coal ("LFC") Demonstration Plant (the "Plant") in Gillette, Wyoming;

WHEREAS, SGI holds a fifty percent (50%) partnership interest (the "Partnership
Interest") and Bluegrass owns the remaining fifty percent (50%) partnership
interest in, a California Partnership, the TEK-KOL Partnership (the
"Partnership"), that owns the technology used in the Plant;

WHEREAS, in connection with termination of the Partnership, (i) a fifty percent
(50%) undivided interest in the LFC Technology has been assigned to SCI and (ii)
after SGI has acquired the Bluegrass Partnership Interest, the remaining fifty
percent (50%) interest in the LFC Technology will be assigned to SGI;

WHEREAS, SGI entered into various agreements with MLFC Corporation, a wholly
owned subsidiary of Mitsubishi Corporation, as of January 14, 1999, to establish
LFC Co.;

WHEREAS, as part of a restructuring of the joint venture between MLFC and SGI
described more specifically in a Letter of Intent dated as of September 24, 1999
(the "LOI"), SGI intends to convey all of its present interests in the LFC
Technology (defined below), including without limitation, all interests in the
Intellectual Property Rights (defined below) with respect to the LFC Technology
and the LFC Patents (defined below) (but excluding the Plant and the Partnership
Interest) to LFC Co.; and

WHEREAS, after the completion of the acquisition of the Bluegrass Partnership
Interest, SGI will assign the remaining fifty percent (50%) interest in the LFC
Technology to LFC Co. in order to enable LFC Co. to have the full and exclusive
right, title and interest in and to the LFC Technology,

NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereto agree as follows:

Article 1. Definition

The following words and phrases, unless the context clearly indicates otherwise,
shall have the meanings set forth below:

"LFC Affiliate" shall mean and collectively include Mitsubishi Corporation, MLFC
Corporation, Mitsubishi Heavy Industries, Ltd. and any person, corporation,
company, partnership, joint venture, entity and/or firm which, directly or
indirectly, controls, is controlled by or is under common control with
Mitsubishi Corporation, MLFC Corporation and/or Mitsubishi Heavy Industries,

<PAGE>

Ltd. A person shall be deemed to be "controlled by" any other person if such
person possesses, directly or indirectly, power (a) to vote 50% or more of the
securities (on a fully diluted basis) having ordinary voting power for the
election of directors or managing general partners; or (b) to direct or cause
the direction of the management and policies of such person whether by contract
or otherwise.

"Intellectual Property Rights" shall mean all rights and intangible property and
confidential information, worldwide, both statutory and nonstatutory, and
includes but is not limited to: ideas, concepts, designs, inventions,
improvements, works of authorship (e.g., computer programs, drawings, and other
works subject to copyrights, design rights or like protection), trade secrets,
and other intangible personal property of any kind, which can be protected
against unauthorized manufacture, use, sale, copying, distribution or
importation by persons other than the owner or authorized user thereof,
including, without limitation:

(a) patents, utility models, inventor certificates, registered designs, mask
works and applications for securing such rights;

(b) copyright registrations and applications for securing copyright
registrations; and

(c) all other rights available to prevent the unlawful use or disclosure of
trade secrets and other confidential information; provided, however, that
Intellectual Property Rights shall not include trademarks, service marks,
trade names or other designations of origin.

"LFC Patents" shall mean those patents and patent applications listed on
Schedule A attached hereto.

"LFC Technology" shall mean any and all information and know-how, as of the
execution date of this Agreement, relating to SGI's (or SGI's sublicensees)
existing and future products with respect to (i) methods of production relating
to the mild pyrolysis upgrading of low-rank subbituminous and lignite coal
including without limitation the convection drying and mild pyrolysis of
low-rank subbituminous coal, with controlled convection gas composition,
temperature, and flow rate; (ii) methods for controlled cooling and
stabilization of the solid product; and (iii) methods for providing process heat
through the efficient and controlled combustion of low-heating-value recycled
gas. LFC Technology shall include without limitation, the LFC Patents, printed
and unprinted technical data, trade secrets, inventions, discoveries,
techniques, works, processes, methods, plans, software, designs, specifications,
communications, protocols, source and object codes and modifications, test
procedures, program cards, tapes, disks and all other scientific or technical
information in whatever form, including all Intellectual Property Rights arising
therefrom.

"Related Agreements" shall mean the Operating Agreement for LFC Co., the LFC
Joint Venture Formation Agreement dated as of January 14, 1999 between SGI and
MLFC, the Services Agreement dated as of January 14, 1999 among SGI, MLFC and
LFC Co. and any other agreements and amendments related thereto.

Article 2. Assignment and Acceptance

SGI hereby irrevocably assigns, sets over, transfers and conveys to LFC Co.,
free and clear of all liens and encumbrances, and LFC Co. hereby accepts, (a)
all of SGI's undivided fifty percent (50%) worldwide right, title and interest
in and to the LFC Technology, including without limitation, the LFC Patents and
the Intellectual Property Rights with respect to the LFC Technology, and (b)all
rights, interests, claims and demands recoverable, in law and equity, that SGI
has or may have in profits and damages for past, present and future
infringements of any of the foregoing, including but not limited to, the right
to compromise, sue and collect such profits and damages, in each case, for the
full term or terms for which the same may be granted (collectively, the
"Assigned Rights").

Article 3. Representations and Warranties

In order to induce LFC Co. to enter into this Agreement, SGI hereby represents
and warrants that:

<PAGE>

(a) SGI is the sole and exclusive owner of all right, title and interest in and
to the Assigned Rights, free and clear of all liens, encumbrances and
restrictions,

(b) All necessary action has been taken by SGI under the laws of the State of
Utah to approve the execution and consummation of this Agreement,

(c) SGI has all necessary corporate power to enter into and perform its
obligations under this Agreement and has taken all necessary corporate action
under the laws of Utah and its certificate of incorporation and by-laws (or
similar documents) to authorize the execution and consummation of this
Agreement,

(d) Neither the execution nor the delivery of this Agreement, nor the
consummation of the transactions herein contemplated nor the fulfillment of or
compliance with the terms and provisions hereof, will (1) violate any provision
of law, regulations, ordinances, government orders, court decrees or similar
items applicable to SGI or otherwise in force and effect in the United States,
or (2) conflict with or result in a breach of any of the terms, conditions or
provisions of or constitute a default under the certificate of incorporation or
by-laws of SGI, or any agreement or instrument to which SGI is a party or by
which it is bound,

(e) All necessary government approvals have been obtained, and all government
filings have been made, as necessary for the parties to enter into this
Agreement and to perform in accordance with its terms,

(f) SGI has the full right, power and authority to assign and transfer to LFC
Co. the Assigned Rights in accordance with the terms and provisions of this
Agreement,

(g) The Assigned Rights do not infringe on or violate any right of any third
party, and

(h) There is no action, suit, claim, proceeding or governmental investigation
pending or, to the best of SGI's knowledge, threatened against SGI with respect
to the Assigned Rights.

Article 4. Indemnification

SGI agrees to indemnify, hold harmless and defend LFC, LFC Affiliates, their
respective directors, officers, employees and agents, the directors, officers,
and employees (collectively, the Indemnified LFC Parties") from, against and
with respect to any claims, suits, demands, judgments, causes of action,
damages, costs and expenses (including, without limitation, attorneys fees and
litigation costs and expenses) arising out of (i) any breach of any
representation, warranty, statement or covenant by SGI, or any distributor,
agent or representative of SGI, made or given in or in connection with this
Agreement and (ii) any actual or alleged infringement of the Assigned Rights
arising out of acts or events occurring prior to the date of this Agreement.
This indemnification shall survive the execution of this Agreement and payment
by LFC Co. of the Contract Price (defined below).

Article 5. Covenants

5.1 SGI shall obtain, comply with the terms of and do all that is necessary to
maintain in full force and effect all authorizations, approvals, licenses and
consents required in or by the applicable laws and regulations to enable it
lawfully to enter and perform its obligations under this Agreement or to ensure
the legality, validity, enforceability or admissibility in evidence of this
Agreement.

5.2 SGI shall, whenever requested, promptly communicate to LFC Co. or its
representatives any facts known to it relating to any of the Assigned Rights,
testify by affidavit or otherwise in any interference or legal proceedings
involving any of the Assigned Rights, and execute any additional instruments,
documents, conveyances or assurances, or take such other actions, that may be
necessary or reasonably desirable to enable LFC Co. or its representatives,
successors, nominees or assigns to secure full and complete protection for each
of the Assigned Rights or that may be necessary or reasonably desirable to vest
LFC Co. or its successor, nominee or assign the rights conveyed hereunder in and
to each of the Assigned Rights, including, but not limited to, authorizing and
permitting LFC Co. to record singly, without need of further participation of

<PAGE>

SGI, LFC Co.'s ownership of any thereof with the US Patent office or any other
governmental authority, agency or body.

5.3 SGI shall not assign, mortgage, charge, pledge or encumber the whole or any
part of the Assigned Rights, any Partnership Interest or any of the LFC
Technology to any third party.

Article 6. Price and Pavment

In consideration of the assignment by SGI to LFC of the Assigned Rights, LFC Co.
shall pay to SGI Seven Hundred Fifty Thousand US Dollars (US$750,000) (the
"Contract Price") upon the Closing Date (defined below) by wire transfer to a
bank account of SGI designated no less than three (3) business days prior to the
Closing Date.

Article 7. Closing

The Closing Date shall be the date upon which MLFC receives written confirmation
that the instruments of assignment of each and all of the LFC Patents have been
filed for recordation with the U.S. Patent and Trademark office evidencing
assignments of the LFC Patents (a) from the Partnership to SGI and (b) from SGI
to LFC Co.

Article 8. Confidentiality

The parties agree that Section 4 of the Second Amendment to LFC Technologies LLC
Operating Agreement executed concurrently herewith shall be applicable to all
confidential information with respect to the Assigned Rights and the LFC
Technology.

Article 9. Miscellaneous

9.1 This Agreement and the Related Agreements, together with any exhibits and
schedules hereto and thereto, contain the entire agreement and understanding
between the parties with respect to the subject matter hereof, and merge all
prior discussions, representations and negotiations with respect to the subject
matter of this Agreement.

9.2 SGI shall not assign or transfer any of the rights or obligations hereunder
without the prior written consent of LFC Co.

9.3 This Agreement is made in accordance with and shall be governed by and
construed in accordance with the laws of the State of California, U.S.A., as
applied to contracts executed and performed entirely with the State of
California, without regard to conflicts of laws rules.

9.4 If a dispute arises between the parties relating to the interpretation or
performance of or non-performance under this Agreement or the grounds for the
termination thereof, the parties agree to hold a meeting promptly following the
request of a party, attended by individuals with decision-making authority
regarding the dispute, to attempt in good faith to negotiate a resolution of the
dispute prior to pursuing other available remedies. If, within thirty (30) days
after such meeting, the parties have not succeeded in negotiating a resolution
of the dispute, such dispute shall be submitted to final and binding arbitration
in Los Angeles, California in accordance with the rules of the American
Arbitration Association as in effect as of the date of this Agreement. To the
extent not provided under the rules of the American Arbitration Association, the
parties shall have the right of discovery as accorded to parties in civil
litigation under the U.S. Federal Rules of Civil Procedure. The parties shall
bear the cost of arbitration equally unless the arbitrators require the
non-prevailing party to bear all or any unequal portion of the prevailing
party's costs (including, without limitation, the prevailing party's reasonable
attorneys' fees). The arbitrators will be instructed to prepare and deliver a
written, reasoned opinion conferring their decision. Decisions of the
arbitrators shall be made by a majority vote. The award rendered in an
arbitration commenced hereunder shall be final and conclusive and judgment
thereon may be rendered in any court having jurisdiction for its enforcement.

<PAGE>

The rights and obligations of the parties to arbitrate any dispute relating to
the interpretation or performance of or non-performance under this Agreement or
the grounds for the termination thereof shall survive the expiration or
termination of this Agreement for any reason and shall apply notwithstanding
compliance or non-use of the good faith resolution procedures of this Section.

Notwithstanding the foregoing, in the event of any breach or threatened or
imminent breach of the provisions of this Agreement intended to protect
proprietary information or designed to restrict the use of intellectual or
industrial property rights, the parties hereto may seek temporary or
intermediate injunctive relief (and similar remedies) from a court of competent
jurisdiction and without having to pursue the good faith resolution efforts of
this Section. For purposes of any litigation pursuant to the foregoing sentence
or for purposes of enforcing the decision of the arbitrator pursuant to this
Section, SGI and LFC Co. hereby (i) consent to the exclusive jurisdiction of
Federal and state courts located in Los Angeles, California, (ii) agree not to
contest venue before such courts on grounds of forum non conveniens or
otherwise, and (iii) agree that service of process may be had by mail or by any
other method permitted by applicable laws and rules.

Upon written request by either party, the arbitration shall be consolidated with
any other arbitration involving any dispute, claim or controversy arising out of
or in relation to any of the Related Agreements or any other document with
respect thereto, or the breach, termination or invalidity thereof.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives as of the date and year first above
written.

SGI International, a Utah Corporation            LFC Technologies, LLC
By:  /S/ MICHAEL L. ROSE                         By:  /S/ SEIJI SHIRAKI
Name: Michael L. Rose                            Name: Se Shiraki
Title: President and CEO                         Title: Chief Executive Officer